Corporate India has weathered the fallout from the U.S. and Israeli war with Iran better than expected, quarterly earnings suggest, strengthening the case for a rebound in the country's long-underperforming equities market.

While companies ranging from Reliance Industries to Hindustan Unilever and IndiGo airline did face pressure from higher input costs and supply-chain disruptions during the April-June period, earnings across much of corporate India have exceeded expectations.

"The strong first-quarter results and better-than-expected performance in several sectors should provide greater comfort to the market's earnings outlook," brokerage Kotak Institutional Equities said in a July 26 note.

A little over halfway through the reporting season, net profit at Nifty 50 companies has risen 11% from a year earlier and is tracking 3.5% above expectations, Kotak said.

The brokerage expects full-year profit growth of 18% for companies in the index.

Tepid single-digit earnings growth has weighed on sentiment towards Indian equities over the past two years, prompting foreign investors to question the market's rich valuations.

The Nifty 50 index is trading at 19.1 times one-year forward earnings, marginally below its 10-year average.

With profit growth now expected to recover into the mid-teens, fund managers are starting to give India a fresh look, Reuters reporters Nimesh Vora, Bharath Rajeswaran and Jaspreet Kalra said in this analysis.

India is also benefiting from a reversal of the crowded AI trade, helping fuel a rally in battered IT services stocks. Is India the ultimate anti-AI trade? Read this Reuters Open Interest column by Manishi Raychaudhuri.

First-quarter results have been ahead of expectations, although subdued on an absolute basis, Citi analysts said in a note on July 30, adding that Indian equities have outperformed in July.  "Further outperformance from here requires broadening of the AI-trade and sustained improvement in the domestic demand environment," Citi said.

Auto firms are among those that have surprised positively on strong demand for SUVs and electric vehicles, even though higher commodity prices dented margins.

Mahindra and Mahindra, which plans to double its EV production capacity over the next five years, reported 23% revenue growth while profits grew slower at 6.8%. Peer Maruti Suzuki reported a 29% increase in sales volume, and while its profits dropped 10%, they were ahead of expectations.

Across financials, the country's largest non-bank lender Bajaj Finance reported a 24% increase in assets on strong loan demand from small businesses and consumption loans, prompting a near double-digit gain in the stock.

Pressure from the consequences of the Iran war was expectedly most visible across oil retailers. State-owned Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum all reported losses for the first time in 15 quarters.

Earnings reported so far indicate steady top-line growth across sectors, albeit accompanied by persistent margin pressures arising from elevated input costs and geopolitical uncertainties, said Bajaj Broking Prive Research in a note on August 1.

Management commentaries across industries have also pointed to sustained business momentum through July, it said.

Bloomberg Index Services has, for the second time this year, deferred the inclusion of Indian government securities in its flagship Global Aggregate Index.

Read more on the reason for that here.

In June, India had widened the pool of securities eligible for foreign investment without limits and removed taxes on capital gains and interest earned by foreign investors on their bond holdings.

The policy changes had boosted expectations of India's inclusion in the widely tracked index and drawn nearly $7 billion in foreign flows.